Question

If the (average) tax rate falls by 10% and as a result the tax base rises by 20%, then tax revenues will

a. rise.
b. decline.
c. remain unchanged.
d There is not enough information given to answer this question

Answer 1

Answer:

c. remain unchanged.

Explanation:

If the tax rate decreases by 20%, it means that households would have more disposable income and the effect of this would be a decrease in tax revenues collected by the government. However, if there is an increase in tax base by 20%, this will cause a revenues to increase by the same proportion hence a counter-effect to the initial tax decrease. The overall net effect would be a no change in tax revenues